Should the government have a stake in tobacco companies?

Updated on Apr 16, 2017 06:48 PM IST

A petition filed in the Bombay High Court is asking a question about the government’s direct and indirect stake in ITC Ltd, India’s largest cigarette company.

A petition filed in the Bombay High Court is asking a question about the government’s direct and indirect stake in ITC Ltd, India’s largest cigarette company.(AFP Photo)
A petition filed in the Bombay High Court is asking a question about the government’s direct and indirect stake in ITC Ltd, India’s largest cigarette company.(AFP Photo)
ByR. Sukumar

Should the government, directly or indirectly, hold a stake in tobacco companies? That’s the substance of a case filed by a group of individuals, some of whom run the Tata Trusts, in the Bombay High Court. The case – the court is yet to decide whether to admit it or not – specifically names ITC Ltd, which it refers to as “primarily” a tobacco company. That’s true, although the Kolkata-based company has diversified successfully into other businesses, including confectionery and packaged consumer goods. Indeed, one of the company’s executives was once affronted that Mint referred to ITC as a tobacco company. Still, the tobacco business contributed over 60% of its revenue from operations and 75% of net profit in the three months ending December 31, 2016, so the petitioners’ description of ITC as a tobacco company is justified.

There’s also no debating the ill-effects of tobacco. ITC, India’s largest cigarette company, has always been aggrieved that the government doesn’t tax beedis and other forms of tobacco, but that’s an entirely different issue, as is smuggling of cigarettes from across the border. The simple answer to whether cigarettes are harmful would be yes.

Directly and indirectly, the government holds a substantial stake in ITC. Through five insurance companies and the so-called Specified Undertaking of the Unit Trust of India (SUUTI), it owns 32% stake in the company. The petitioners in the case in Bombay are asking whether it should.

Like Larsen & Toubro (L&T) Ltd, another private company in which the government directly and indirectly holds a significant stake, ITC is a board-managed company with no promoters, Indian or foreign (as defined by Indian rules). It is run by professional managers whose only stake in the company comes from stock options (and ITC is generous with them). Some of the government’s stake in the two companies can be traced back to US-64, the guaranteed return mutual fund run by the Unit Trust of India that went belly up in the early 2000s. The value of the units was below the guaranteed return, so the government made good the difference and took over the shares. And some of the stake is historical (as in, the government insurance companies have held them forever, or so it seems).

The government’s holding in the two companies has protected them from corporate raiders, domestic and foreign. In the late 1980s and early 1990s, for instance, it was this holding that eventually prevented Reliance Industries Ltd from taking over L&T, although the late Dhirubhai Ambani did have control for some time and even served as the company’s chairman (I’ve cut a really long and interesting story short). And in ITC’s case, it is this holding that has kept at bay British American Tobacco, which has around 30% stake in ITC through subsidiaries.

Every now and then, there is talk of the government selling the stake it holds in the two companies through SUUTI, but, in ITC’s case, such proposals are always accompanied by a caveat that BAT will not be allowed to bid for the shares. Which is as it should be – we need more professionally-managed, board-run companies such as ITC and L&T.

Interestingly, ITC also gets another form of protection from the government. Indian rules do not allow foreign direct investment in the manufacture of tobacco products and media reports last year suggested that the commerce ministry is considering not even allowing franchising, management contracts, and technical collaboration in any tobacco business. The government’s stated rationale in both cases isn’t the protection of the domestic industry (of which ITC is the biggest representative), but the harmful effects of tobacco. This is laudable.

The petition in Mumbai needs to be seen in this context. Legally, there may not be anything to prevent state-owned insurance companies and other government agencies from holding a stake in any company for financial and investment reasons, but the court may choose to look beyond – at the same logical and moral argument (safeguarding the health of people) that the government used to rationalise its ban on foreign investment in tobacco.

The government may just have to put that in its pipe and smoke it.

R Sukumar is editor, Mint

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